One of the speakers at the recent Morningstar Conference said ‘people who have passed out in 2007 have only seen a volatile market’. To me this showed lack of understanding of the history of the markets. Sorry for being blunt, but markets have been volatile from the day they were created. More than 100 years ago when somebody from the media asked Mr. J P Morgan ‘How do you think the markets will be?’ he said ‘Volatile’. This is very true today, and is likely to be true 200 years later too.

People forget that VOLATILITY allows you to make money. In fact for the guys who understand volatility makes a great bedfellow.

Many of today’s equity sales people (never mind if they are hawking mutual funds, direct equity, pms, or life insurance) may not really have a perspective on the long-term positive attributes of equity investing. Certainly, equity markets do not always deliver positive returns in a steady upward fashion. Nor are they obliged to do so. Instead, equity markets are volatile. This short-term volatility is the reason we expect a long-term real return. IN fact many people keep wondering how compounding works in such a situation!! Shows that they neither understand markets nor mathematics.

July 2008 was an ugly month for equities – nationally and internationally. A combination of oil prices hitting record highs and bad news about credit and housing in the US caused the indices to give up a lot of its gains – tough pill to swallow.

Sudden and sharp drops in the stock market make for scary headlines and unfortunately high TRPs! However, they can also make for sleepless nights for investors who look at drops in their net worth without an awareness of the ample backdrop of historical data that shows we have been here before and eventually recovered the loss. The other problem for never say die bulls is the temptation to buy. This happens because of a disease named “anchoring” – “I have seen L&T at 4320, so it must be cheap at 2745” or “I have seen SBI at Rs. 2450, so it must be cheap at Rs. 1345”. I am not here to teach behavioral finance, but I am sure that you get what I mean.

Now in 2014 December, people pretend that the market is in a bull run and other than Subra everybody knows that. I am amused by people who say that I am scaring people away from equities. Let us get something clear – my blog gets about 5000 readers a day – and I would think many of them are equity investors, and many of them WERE equity investors before this blog was born in 2008. So obviously on those people I cannot be having an impact. I am just saying that markets are volatile. Willing to repeat it a zillion times.

I am also saying that volatile markets help you make money. Tons of it. Go learn, take your money and make it more. If you cannot run a blog like so many of us are doing.

For this reason, an understanding of stock market history enables investors to maintain confidence in capitalism and the long-term staying power of the equity markets. Reading a Peter Lynch or Buffet or Fisher surely will help you go a long way.

 

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  1. “Certainly, equity markets do not always deliver positive returns in a steady upward fashion. Nor are they obliged to do so. Instead, equity markets are volatile. This short-term volatility is the reason we expect a long-term real return. IN fact many people keep wondering how compounding works in such a situation!! Shows that they neither understand markets nor mathematics.”

    Looks like I neither understand markets, nor math. Yes, I’m sorry, but I still don’t understand how compounding works in the above situation. Could you please consider writing a post explaining the same? I’m sure a lot of others out there have the same question. Thanks much!

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